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Mortgage payments to edge higher with rate hike

A quarter-point hike in the Bank of Canada’s overnight lending rate expected Wednesday will translate immediately into increased payments on variable rate mortgages and lines of credit, but the added cost will likely be below the discomfort threshold for the majority of households.

“It’s not going to be a huge dislocation for most,” said Paul Taylor, chief executive of Mortgage Professionals Canada. Taylor suggested that even a full percentage point increase wouldn’t necessary lead to significant stress or a major spike in payment delinquencies.

“Canadians on mass are phenomenally responsible in managing mortgage debt.”

The Bank of Canada has strongly hinted it could hike the key interest rate Wednesday to 0.75 per cent, which would be the first increase in nearly seven years.

Taylor said the payment on a $500,000, five-year variable mortgage amortized over 25 years would rise by $104 per month with a 25-basis-point hike, adding that the average mortgage balance in Toronto and surrounding areas is between roughly $300,000 and $400,000.

Variable loans represent roughly 30 per cent of the mortgage market in Canada, said Dan Eisner, founder and CEO of Calgary-based True North Mortgage.

He said the average variable mortgage payment across the country would increase by about $25 per month with a quarter-point hike in the rate.

Some mortgage brokers contacted by the Star suggested any hike may not be followed by steady increases over the rest of the year and into 2018, with the Bank of Canada needing to justify further moves with real evidence of mounting inflation.

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But some foresee the central bank gradually lifting rates by a full percentage point by the end of 2018.

Others say the bank may not even raise rates Wednesday, holding off until its next scheduled rate fixing meeting in the fall amid the uncertainty over oil price futures.

Eisner noted that five-year bond yields, which determine five-year mortgage rates, have jumped 0.4 per cent in the last few days to a level not seen since late 2014, before the oil price crash forced the Bank of Canada to drop rates in 2015 to 0.5 per cent.

While those with a fixed mortgage won't be immediately affected by rising interest rates, some experts say those nearing the end of a five-year term may want to lock in for another five years, even if that may incur penalties

RBC has already boosted interest rates on some of its mortgages ahead of the Bank’s announcement. Their fixed-term mortgage rates have gone up by 20 basis points each – the two-year rate is now 2.54 per cent, three-year rate is 2.64 per cent, and five-year rate moves up to 2.84 per cent.

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Janine White of RateSupermarket.ca said a rate hike is probably due because of such factors as GDP growth averaging 3.5 per cent over the past three quarters, although inflation is running at just 1.5 per cent

“The difference between variable and fixed rates will grow larger – homeowners with variable rates will want to consider moving to a fixed interest rate mortgage and homeowners with fixed rates up for renewal will want to nail down the rates before the hike,” she said in a note to clients.

She said home buyers will be impacted, noting that RBC’s 20-basis point increase to 2.84 per cent for five-year mortgages would cost a buyer an additional $93.00 monthly — $1,116 annually — based on the average GTA home price of $921,000.

Recent studies, she added, show that nearly three-quarters of Canadian homeowners say they would have difficulty paying their mortgage if their payments were to increase by more than 10 per cent.

“The last time the Bank made a rate change was in July 2015, cutting it from 0.75 per to 0.50 per cent and all of the big banks eventually reacted with a 0.15 per cent decrease in rates,” said mortgage comparison website RateHub.ca in a commentary.

“With an increase, however, it’s most likely the full amount will be passed along to consumers. This will impact variable rate consumers immediately."

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As for what happens next, "It's going to be very important to listen to the language the Bank uses on Wednesday regarding future moves,” RateHub.ca noted.

“Since their comments in early June, Canadian bond yields . . . thus fixed rates have already gone up across the board. The (potential) rate increase has already been priced in for fixed rate consumers.

“Any additional comments for future increases will be the real trigger for more fixed rate increases following the announcement, rather than the rate change itself."

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